Tax preparation can be complicated, and many people hire professionals to help them file accurately and on time. Paying for these services can be a significant expense, which leads many people to ask: Are tax prep fees tax deductible?
The short answer is that it depends. Whether you can deduct those fees often hinges on your filing status, whether you’re an employee or self-employed.
This article will cover the deductibility of tax preparation fees for both individuals and businesses, factors that affect these fees, and tips for minimizing costs. We’ll also touch on how the Tax Cuts and Jobs Act (TCJA) impacted what you can deduct.
Tax preparation fees: Deductible for businesses, limited for individuals
The rules for deducting tax preparation fees are very different depending on whether you’re filing for a business or as an individual.
Deductibility for business owners and self-employed individuals
Generally speaking, if you’re self-employed or a business owner, you can deduct tax preparation fees as a business expense. This rule applies to sole proprietorships, partnerships, LLCs, and S-Corps.
Deductible expenses can include software, e-filing fees, CPA fees, and legal fees related to filing your business taxes. The IRS considers these “ordinary and necessary” business expenses, so they can be deducted.
Deductibility for W-2 employees
If you’re a W-2 employee and you take the standard deduction, you usually can’t deduct tax preparation fees. The Tax Cuts and Jobs Act (TCJA) put a stop to most itemized deductions, including tax preparation fees.
There may be some rare exceptions, but in most cases, W-2 employees can’t deduct these expenses.
What tax preparation expenses are deductible?
In some cases, you can deduct tax preparation expenses from your income. Here’s a quick guide.
Business-related expenses
If you own a business, you can deduct the fees you paid to have your business tax returns prepared. This includes fees for preparing Schedule C, Schedule E, Schedule F, and Schedule K-1.
You can also deduct the costs of resolving tax disputes with the IRS related to your business, along with expenses like bookkeeping software and accounting fees.
Non-deductible expenses
If you’re like most people, you can’t deduct any personal tax preparation fees. You also can’t deduct expenses related to hobbies or activities that aren’t considered a business. In addition, you can’t deduct the cost of preparing past tax returns in the current tax year.
How to claim the deduction for business tax preparation fees
If you’re self-employed or own a business, you can usually deduct tax preparation fees. Here’s how:
- Schedule C (Profit or Loss from Business): Use this form if you’re a sole proprietor. You’ll report all your business income and expenses, including what you paid for tax preparation.
- Schedule F (Profit or Loss from Farming): Farmers use this form to deduct tax preparation fees related to their farming business. It’s similar to Schedule C, but specific to farming.
- Schedule E (Supplemental Income and Loss): If you have rental income or royalties, you can deduct tax preparation fees related to those activities on this form.
Important: You can only deduct fees in the tax year you paid them.
What affects tax preparation fees?
A few things can influence how much you pay a professional to handle your taxes:
- The complexity of your return. The more complicated your finances are, the more time and expertise a tax preparer will need.
- The type of professional you hire. Certified Public Accountants (CPAs) typically charge more than other tax preparers because of their advanced training.
- Your location. Tax preparation fees can vary depending on where you live.
- The number and complexity of forms. The more forms you need to file, the more you’ll likely pay.
- The amount of bookkeeping. If you need someone to organize your financial records, that will add to the cost.
How do tax preparers charge for their services?
Tax preparers typically bill in one of four ways:
- Hourly rates: The professional tracks their time and bills you by the hour. This works well for complex situations and ongoing advice.
- Flat fees: You pay a set price for a specific service, like preparing a 1040 form. This is ideal for simple tax returns.
- Per-form fees: The preparer charges a fee for each form they complete.
- Percentage of refund: The fee is a percentage of your refund. Experts generally advise against this since it can create a conflict of interest.
Why should small businesses hire a CPA?
Tax season is a headache for a lot of small business owners. If you’re like most, you’re probably wondering whether you should hire a certified public accountant (CPA).
Here are a few reasons why you might want to:
- Strategic tax advice. CPAs can help you plan for tax season and minimize your liabilities.
- Time savings. Outsourcing your taxes frees you up to focus on the core functions of your business.
- Reduced stress. Knowing your taxes are being handled by a professional can reduce stress and anxiety.
- Financial efficiency. A CPA can identify deductions and credits that you might otherwise miss.
- Accuracy. You’re less likely to make a mistake that could lead to penalties.
In Summary
In general, businesses can deduct their tax preparation fees. However, most individuals can’t. Rules and regulations can change, so it’s important to stay up to date.
If you’re not sure whether you can deduct your tax prep fees, consult with a qualified tax professional who can help you determine the best course of action for your specific circumstances.